Tuesday, July 20, 2010

Fw: Policy Brief: Pittsburgh's Pension Solution: Between a Rock and Hard Place

Policy Brief

An electronic publication of

The Allegheny Institute for Public Policy

July 20, 2010Volume 10, Number 38

In last week's Policy Brief (Volume 10, Number 37) we showed that the proposal to lease Parking Authority facilities as a means to raise $200 million for Pittsburgh's pension funds would require—at a minimum—a near doubling of the cost to park at the lessee's garages, lots and meters.Factoring in inflation, the hikes in cost to park necessary to make the lease a break even situation for the lessee could exceed 100 percent in four to five years.Clearly, there is a high probability such large increases in parking rates at the Parking Authority's spaces will be a major deterrent to parking in the City.Many businesses would suffer, creating further, and possibly irreparable, economic damage to Pittsburgh's already beleaguered private sector.And that in turn will reduce the City's tax base, something it can absolutely not afford.

One potential consequence could be construction of additional private garages and lots to compete with the lessee's spaces.Of course in the Downtown area that is hard because of the paucity of sites for such construction. However, in other parts of the City that could happen fairly quickly and easily.The result would be loss of patronage at the lessee's facilities making it even harder for the leasing company to avoid losses.

Another unintended consequence of the massive jump in rates at the leased Parking Authority spaces is the opening it would give privately owned facilities, especially those in close proximity to a lessee facility, to raise their parking rates. After all, one of the effects of publicly owned spaces such as the Parking Authority is to hold down average parking rates. Because the publicly owned facility is not subject to taxes on property, payrolls, or any of the other myriad taxes paid by business and does not have to earn a return on investment, it can charge lower rates than privately owned parking facilities.

By way of background bear in mind that the high cost of parking in Pittsburgh, particularly Downtown, stems from two basic elements. First, there is a tight supply of spaces relative to the demand for parking.Second, the City's extraordinarily high parking tax—aimed at commuters and visitors—boosts the price substantially. At 40 percent a $10 rate becomes a $14 charge. This is well above what most comparable cities levy. Indeed, most such cities have no parking tax.The point is tight supply and the resulting high prices deter some potential parkers who would venture into town if parking rates were lower. But lower rates will only come about if supply of spaces rises significantly; there is a dramatic and unexpected permanent decline in demand or if the parking tax rate is reduced substantially.

The pressing problem facing the City is the deal the Mayor made with the Legislature last year that kept Pittsburgh from having its pension fund administration taken over by a state agency.The Mayor asked for time to find a solution to the City's underfunded pensions in exchange for the City pension funds not being brought under immediate state administration.Now the City has until the end of the year to get the pensions funded at the 50 percent level or lose control over pension fund management.

Since the legislative deal was made, Pittsburgh has been focused on leasing the Parking Authority facilities as a means to raise the $200 million needed to lift pension funding to 50 percent.To accomplish that, a lessee would have to come up with roughly $300 million so the $100 million in Parking Authority debt could be retired. And as noted earlier that amount necessitates a doubling of parking rates to create a break even situation for the lessee.

Unless the City completes the lease transaction by January, it will face a state takeover of the pension funds and could be required to boost its annual contribution as much as $30 million.Given Pittsburgh's shaky financial picture, finding $30 million more each year is a daunting task. Major spending cuts and possibly higher property or other taxes would have to be on the table.

So, here's the predicament: to proceed with the $300 million proposed lease by the end of the year or not. Either option poses serious economic and/or political headaches for the City.Which option would be worse and are there alternatives to the two options that could be developed before January?

Doubling the cost of parking is definitely the worst option. The potential harm to the Pittsburgh economy and its business community is simply not worth taking. At the same time, making a 7 percent cut in general fund spending would produce most of the $30 million in additional funding that will be required if the City does not proceed with the lease.Those savings can be realized by outsourcing services that are easiest to privatize, freezing wages, instituting a hiring freeze and cutting staff as required to meet spending cuts. Note that a 7 percent spending cut would still leave Pittsburgh's per capita general fund expenditures far above comparable U.S. cities.The spending cuts could be phased in over two years to allow time to implement the big changes.

And while making the 7 percent reduction in spending will be politically difficult, it would be far better for the City's future than doubling parking rates.

There are some things the City can do to help itself out of the dilemma. First, it could go hat in hand to the Legislature and ask for more time to find a fix for the massively underfunded pensions. There is a chance the Legislature might listen if the City can show a reasonable plan for getting to the 50 percent funding level over a short period of time that does not involve doubling parking costs. Still, given the nature of the pressure used to induce the Legislature to make the existing deal, they may well give the City's request short shrift.

Second, the City could slash the parking tax rate. As noted previously one of the factors driving the required parking rates so high is the 40 percent parking tax rate that will go into effect in 2011 if a lease is consummated.If the parking tax were lowered to 20 percent the parking price would have to rise only 58 percent. And if the lessee could save $5 million in operating expenses, the parking prices would need to rise only 41 percent. This would be a much more manageable increase that would put the lessee rates in line with private parking facilities.

The down side is that cutting parking tax rates to 20 percent would result in a significant decline in parking tax revenue because the overwhelming share of parking revenue is generated by private facilities and those owned by other authorities. The prospective revenue loss will almost certainly dissuade the City from seriously entertaining the suggested tax rate reduction. However, by making appropriate cuts in government spending the lost parking tax revenue could be offset.And most importantly perhaps, the lease could go ahead and $200 million for the pension funds would be in place and the state would not be taking over the pension funds.

Raising $200 million in a lump sum by the end of the year without hurting the City is a daunting challenge.Pittsburgh finds itself in this dilemma because of years of neglect and failure to act in a financially responsible way. There are no easy ways out at this juncture. There is no free lunch. A $300 million payment by a lessee to buy an entity with net operating revenues of $7 million has to be paid for. Better that it not be through a doubling of the price to park at 19,000 spaces. The time to bite the bullet and make significant spending cuts is here.

Jake Haulk, Ph.D., President

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